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Mortgage lending’s greatest risks and opportunities in 2015

By David Catt on 20 April 2015

Mortgage approvals hit a six-year high at the start of 2014 with the return of pent-up demand for housing, improving economic outlook and low mortgage rates.

Since then, demand for mortgages has slowed with applications down by 13% over 2014 and overall volumes of approvals flat. Remortgage volumes continue to drift lower while lending for home purchase was up 5% in 2014, following a 20% increase in 2013.

Looking ahead we expect demand for mortgages to remain in line with current levels. While the economy continues to improve, the challenge for the industry is finding those who want to borrow or have the financial capacity to borrow given the stringent affordability tests now in place.

While we have seen growing demand from first-time buyers and investors, existing home-owners with a mortgage remain reluctant to move, accounting for just 35% of all house sales last year. The economy is continuing to recover, we are seeing incomes rise and house price growth spread further. With the general benefits being felt more widely demand for mortgages will also be supported.

Against this backdrop, mortgage lenders will focus on cost and efficiency of their operations, maintaining credit quality and, where possible, exceeding regulatory requirements. There appears to be little sign of deteriorating credit quality with high loan-to-value mortgages at extended loan-to-income multiples accounting for just 2.5% gross advances. However, there has been growing focus on more profitable niches, an example being buy-to-let which is approaching 15% of gross advances, up from a low of 5% in 2009 and higher than the 12% recorded in 2007.

The Bank of England is keeping a close eye on the buy-to-let market and the impact of concentrations of investors on pricing levels. Regulating this segment of the market has particular complexities, but mispricing in investor markets is one of a series of second tier risks facing lenders after the primary risk of rising interest rates.

Rental growth has varied widely over the last decade from flat to growth of over 45%. Rental affordability is the most stretched in London while in the regions the affordability of renting is the best for a decade.

The housing market has been at the centre of a storm in recent years. From rent cuts for housing associations, to extending the Help to Buy scheme, and tax changes aimed at curbing investor demand, all types of organisations have had to react to a plethora of policy changes.